Real Money

Some Top Funds Are Dumping Bonds

Some top managers are fleeing fixed income and shifting to stocks.

NEW YORK ( TheStreet) -- Bond funds have been struggling. The average intermediate-term fund dropped 1.9% during the past month. Rising interest rates have caused the losses. When rates climb, bond prices tend to fall. Is it time to start trimming your bond holdings? Some top-performing fund managers think so. These managers oversee balanced funds, which hold mixes of stocks and bonds. Lately the funds have been lowering their allocations to fixed income.

The shift by the managers is worth considering because the funds have all shown deft timing in the past. During the stock downturn of 2008, the managers moved into fixed income, helping to protect shareholders. All the funds finished in the top quarter of Morningstar's moderate allocation category for the past five years. The strong performers include Franklin Income ( FKINX), Madison Diversified Income ( MBLAX), Villere Balanced Fund ( VILLX) and Westwood Income Opportunity ( WWIAX).

Ed Perks, portfolio manager of Franklin Income, has made a particularly dramatic move. Concerned about shaky stock markets in 2011, Perks had two-thirds of assets in fixed income and one third in equities. But now he has reversed the allocations, putting about two thirds in equities. "We lost interest in fixed-income as the market went through a transition in recent years to lower yields," he says.

Perks can invest in a variety of bonds, but he is shying away from high-yield securities, which are rated below investment grade. Those now yield 5.25% -- not enough to compensate for the risks, says Perks. For extra protection, he has been trimming bonds that have maturities of more than seven years. The longer bonds tend to fall sharply when interest rates rise.

Villere Balanced can hold 25% to 40% of assets in bonds. The fund is currently near its bottom limit. "We are worried that the next move in interest rates will be up," says portfolio manager Sandy Villere, III.

Villere says that in the past month interest rates on 10-year Treasuries rose from 1.7% to 2.2%. That caused the bond prices to fall by 4%. "People who bought 10-year Treasuries a month ago have already lost two years' worth of interest," he says.